Singapore Airlines (SIA) - OCBC Investment 2018-10-17: Are We In A Crisis Like 2008?

Singapore Airlines (SIA) - Are We In A Crisis Like 2008?

2QFY19 to be impacted by Virgin Australia.

Trading at depressed valuations.

Negatives likely priced in.

Trading at the trough of 2008

The share price of Singapore Airlines (SIA) has dropped 23% from its peak of S$11.80 around end May this year, and is now trading at its 52-week low. At the current price of S$9.15, this is close to the 2008 crisis low of S$9.05 and is just 11% higher than the 2002-2003 SARS crisis low of S$8.25.

In terms of valuations, the stock is trading at 0.8x cons. forward P/B, close to its 2008 lows as well.

Though consensus is estimating a dividend yield of ~4.2%, we note that this is likely based on last year’s dividend of S$0.40/share, which may or may not be sustained given there is historically less consistency in the group’s dividends compared to other Singapore-listed blue chips.

Impact of rising fuel prices likely priced in

We share the market’s concerns about rising fuel prices but we note that

for FY19, about 45% of SIA’s fuel needs are hedged (jet fuel 20% at US$65 on average, and Brent 25% at US$54 on average),

SIA’s current share price is now even lower than previous instances when Brent was trading at much higher levels. When Brent crude touched a high of US$144/bbl in Jul 2008, SIA traded around S$14.30. When Brent sustained at high levels of US$100-110/bbl in 2011-2013, SIA traded between S$9.50-S$11.50.

~ SGinvestors.io ~ Where SG investors share

Strong passenger load factors

Ahead of last week’s relaunch of the world’s longest flight to a New York City-area airport, SIA’s planes to the US were also much fuller in Sep – passenger load factor in Sep 2018 to the Americas increased from 79.5% in Sep 2017 to 85.5% in Sep 2018.

Overall passenger load factors (SIA, Silkair, Scoot combined) are also generally higher this year (min of 80.3% in May, max 85.9% in Jul) compared to previous years.

We acknowledge that cargo load factors may remain weak, but this has also been well-flagged in the market earlier.

One-offs from Virgin Australia in 2QFY19 results

In the upcoming 2QFY19 results, the group should recognise its share of losses from Virgin Australia which saw one-off items such as impairments, and we tweak our Fair Value lower from S$11.01 to S$10.71 (0.9x P/B).

But given the depressed valuations the stock is trading at, there is good upside should passenger and cargo yields turn out to be better than expected.

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